CASH FLOW STATEMENT  Definition "A statement of changes in the financial position of a firm on cash basis is called a cash flow statement." The cash flow statement describes the inflow (sources) & outflow (uses) of cash. It summarises the causes of changes in cash position of a business enterprise between two balance sheets. Differences between Fund Flow Statement & Cash Flow Statement Fund Flow Statement Cash Flow Statement1) It is based on a wider concept of funds i.e working capital

1) It is based on a narrower concept of funds i.e cash

2) It is based on accrual basis of accounting

2) It is based on cash basis of accounting

3) Changes in current assets & current liabilities appear separately in a schedule of changes in working capital

3) No schedule of changes in working capital. The changes in current assets & current liabilities are summarized in the cash flow statement.

4) It is useful in planning intermediate & long term financing.

4) It is useful for short term analysis & cash planning of the business.

5) It reveals the sources & applications of funds of an organization.

5) It classifies all cash inflows & outflows in terms of operating, investing & financing activities.

 Classification of Cash Flows1) Cash flows from operating activities2) Cash flows from investing activities3) Cash flows from financing activities Cash flows from Operating Activities Operating activities are the basic revenue producing activities of the enterprise. The amount of cash flows arising from operating activities is an indicator of a firm's operating capability to generate sufficient funds to meet its operating needs, pay dividends, repay loans, etc. without depending on external sources of finance. Examples of cash flow from operating activities

1)      cash receipts from sale of goods & rendering of services2)      cash receipts from royalties, fees, commissions, etc3)      cash payment to suppliers of goods & services4)      cash payment to & behalf of employees5)      cash receipts & payments of an insurance company for premiums, claims,

annuities, etc6)      cash payments or refunds of income tax relating to operating activities Cash flows from Investing Activities Investing activities are the acquisition & disposal of long term assets & investments. A separate disclosure of cash flows arising from investing activities is important

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because cash flows represent the extent to which expenditure have been made for resources to generate future incomes.

 Examples of cash flow from investing activities1) cash payments to acquire fixed assets (including intangibles).2) cash receipts from disposal of fixed assets (including intangibles)3) cash receipts from disposal of shares, warrants, debt instruments, etc4) cash advances & loans made to third parties.5) cash receipts from the repayment of advances & loans made to third parties. Cash flows from Financing ActivitiesFinancing activities are activities that result in changes in the size & composition of the owners' capital (including preference share capital in the case of a company) & borrowings of the enterprise. Examples of cash flows from financing activities

1)      cash proceeds from issuing shares or other similar instruments2)      cash proceeds from issuing debentures, loans, bonds & other short or long

term borrowings3)      cash repayments of amounts borrowed such as redemption of debentures,

bonds, preference shares. Uses & Significance of Cash Flow Statement Cash Flow Statement is of vital importance to the financial management & short term financial planning. Its various uses are as follows:1) Cash Flow Statement is prepared on cash basis hence it is useful in evaluating the cash position of an enterprise.2) A projected cash flow statement can be prepared so that it can enable the firm to plan & co – ordinate its financial operations efficiently. 3) A comparison of historical & projected cash flow statements will reveal variations in the performance so that the firm can take immediate effective action.4) It indicates whether a firm's short term paying capacity is improving or deteriorating over a period of time by preparing cash flow statements for a number of years.5) It helps in planning the repayment of loans, replacement of fixed assets etc. It is also significant for making capital budgeting decisions.6) It clearly indicates the causes for poor cash position inspite of substantial profits in a firm by throwing light on various applications of cash made by the firm.7) Cash Flow Statement provides information of all activities classified under operating, investing & financing activities. Limitations of Cash Flow StatementDespite of a number of uses, cash flow statement also suffers from the following limitations:1) As cash flow statement is based on cash basis of accounting, it ignores the basic accounting concept of accrual basis.2) Cash Flow statement is not suitable for judging the profitability of a firm as non – cash charges are ignored while calculating cash flows from operating activities.3) Funds flow statement presents a more complete picture than Cash flow statement.4) It is difficult to define the term "cash". There are no controversies over a number of items like cheques, stamps, postal orders etc whether they are to be included in cash. 

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Note:1) An increase in liability is a source of cash or cash inflow eg increase in creditors implies purchase of goods on credit. Although no cash is received we can say that creditors have given us loans which we have utilized to purchase goods from them.2) A decrease in liability is an application of cash or cash outflow. Eg sundry creditors are paid off.3) An increase in asset is an outflow of cash. Eg goods sold on credit.4) A decrease in asset is an inflow or source of cash. Eg sale of stock, cash received from debtors. Actual flow of cash It is the movement of cash that results in actual inflow or outflow of from the firm. Eg When shares are issued for cash or when loan is repaid or when assets are sold for cash. Notional flow of cash It refers to delayed receipts & payments. Increase in current liabilities like trade creditors, bills payable, etc results in notional inflow of cash as here cash inflow is implied. Usually increase in long term liabilities generate actual cash & increase in current liabilities generate notional cash. Problems

Cash flow statement of sole proprietors

1. Balance Sheet of Mr. A on 01.01.2005 & 31.12.2005 were as follows.LIABILITIES 1.1.2005 31.12.2005 ASSETS 1.1.2005 31.12.2005

 CapitalMrs B's LoanLoan from SBISundry Creditors

 1,50,00030,00060,000 50,000

 1,90,000--------80,000 56,000

 CashDebtors.StockFurnitureMachineryLandBuildings 

 20,00054,00048,0002,00090,00036,00040,000

 26,00076,00042,0002,00065,00045,00070,000

  2,90,000 3,26,000   2,90,000 3,26,000During the year.

1. A Machine costing is 12,000/- (accumulated depreciation of Rs 4000/-) was sold for Rs.5, 500/-

2. The provision for depreciation against machinery as on 1.1.2005 was Rs.24,000/- and on 31.12.2005 was Rs.37,000/-

3. Net profit for the year 2005 amounted to Rs.60, 000/- You are required to prepare cash flow statement.

2. Prepare a cash flow statement of Mr. Kumar.

LIABILITIES 1.1.2006 31.12.2006 ASSETS 1.1.2006 31.12.2006 Current liabilities

   35,000

   40,000

 Cash

 5000

 4,000

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Loan from Mrs.XBank LoanCapital

  -------- 40,0001,50,000 

  25,000 30,0001,54,000

Debtors.StockLandBuildingsMachinery

40,00030,00030,00050,00070,000

45,00025,00040,00055,00080,000

  2,25,000 2,49,000   2,25,000 2,49,000 During the year Kumar brought in additional capital of Rs.10,000 and his drawings during the year was Rs.31,000. Provision for depreciation on machinery opening balance Rs.30, 000 and closing balance Rs 40,000. No depreciation needs to be provided for other assets. Cash flow statements of companies

3. The following details are available from a company  LIABILITIES 31-12-98

Rs.31-12-99

Rs.ASSETS 31-12-98

Rs.31-12-99

Rs.Share capitalDebenturesReserve for doubtful debtsTrade creditorsProfit and Loss A/c

70,00012,000 70010,36010,040

74,000 6,000 80011,84010,560

CashDebtorsStockLandGoodwill

9,00014,90049,20020,00010,000

7,80017,70042,70030,000 5,000

  1,03,100 1,03,200   1,03,100 1,03,200In addition, you are given:1. Dividend paid total Rs.3,500 2. Land purchased for Rs.10,000 3. Amount provided for amortisation of goodwill Rs.5,000 4. Debentures paid off Rs.6,000Prepare Cash flow statement

 4. The following are the comparative balance sheets of XYZ as on 31st December

2005 and 2006 LIABILITIES 2005 2006 ASSETS 2005 2006

Share capital(shares of Rs.10 each)Profit and loss a/c9% DebenturesCreditors 

3,50,000 50,400 60,000 51,600

3,70,000  52,800 30,000 59,200

Land StockGoodwillCash & BankTemporary investmentsDebtors

1,00,000 2,46,000 50,000 42,000 3,000 71,000

1,50,0002,13,500 25,000 35,000 4,000 84,500

  5,12,000 5,12,000   5,12,000 5,12,000Other particulars provided to you are : (a) Dividends declared and paid during the year Rs.17,500 (b) Land was revalued during the year at Rs.1,50,000 and the profit on revaluation transferred to profit and loss a/c. you are required to prepare a cash flow statement for the year ended 31-12-2006.

 5. From following information calculate C.F.S

LIABILITIES 2006 2007 ASSETS 2006 2007Equity capitalReservesSundry creditor.O/s wages paid

1,40,000 74,000 32,000 3,000

1,40,0001,05,000 35,000 4,000

Fixed Assets (net)CashSundry Debtors.Inventories.

90,00075,00043,00049,000

87,00097,00040,00058,000

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Miscellaneous expenses o/s

11,000

3,000

Prepaid Rent 3,000 5,000

  2,60,000 2,87,000   2,60,000 2,87,0001. Accumulated depreciation was Rs.16,000 at the end of 2006 and Rs. 19,000 at the end of 2007.2. Other information:

Wages Rs.23,000Sales 3,00,000Miscellaneous operating Expenses Rs.47,000Depreciation Rs.3000Cost of Goods sold Rs.1,90,000

 6. From following information, prepare a cash flow statement of C.P. Ltd. For the year ended 31st December, 2007

BALANCE SHEETLIABILITIES 2006

Rs.2007Rs.

ASSETS 2006Rs.

2007Rs.

Share capitalSecured loans(repayable in 2015)CreditorsTax payableProfit and Loss A/c

70,000  ----- 14,000 1,000 7,000

70,000 

40,00039,000 3,00010,000

Plant and MachineryInventoryDebtorsCashPrepaid Expenses

50,00015,000 5,00020,000 2,000

91,00040,00020,000 7,000 4,000

  92,000 1,62,000   92,000 1,62,000  PROFIT AND LOSS ACCOUNT

(for the year ended 31st December 2007)  Rs.   Rs.

To opening inventoryTo purchaseTo gross profit C/d To general expensesTo depreciationTo taxesTo net profit C/d To dividendTo balance C/f

15,000 98,000 27,000 1,40,000 11,000 8,000 4,000 4,000 27,000 1,000 10,000 11,000

By Closing stockBy Sales  By Gross profit b/d    By balance b/fBy net profit b/d

40,0001,00,000_______1,40,000 27,000  _______ 27,000 7,000 4,000 11,000

7. ABC Ltd. has submitted the following condensed balance sheet as on 31st

December 2006 and 31st December 2007 and the statement of income and reconciliation of retained earnings for the year ended 31st December, 2007.  

BALANCE SHEETSLIABILITIES 2006

Rs.2007Rs.

ASSETS 2006Rs.

2007Rs.

Share capitalGeneral Reserve

3,00,000 80,000

4,00,0001,00,000

Fixed Assets Less: accumulated

7,00,000 

8,00,000 

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Retained Earnings6% DebenturesLoans o mortgageSundry CreditorsWages OutstandingProvision for income tax

60,0002,00,000 --------1,85,000 3,000 75,000

90,0001,25,000 40,0001,05,000 5,000

1,40,000

depreciation StockSundry DebtorsCash in hand/bankPrepaid ExpensesPreliminary expenses

2,25,0004,75,0001,25,0001,80,000 95,000 3,000 25,000

2,60,0005,40,0002,00,0001,50,000 89,000 6,000 20,000

  9,03,000 10,05,000   9,03,000 10,05,000 

STATEMENT OF INCOME AND RECONCILIATION OF RETAINED EARNINGS (For the year ended 31st December 2007)

SalesLess: Cost of goods sold: stock of 1st Jan,2007Add: Purchases  Less: Stock on31st Dec, 2007 Less: WagesGross Income Less: sundry expensesPreliminary expenses written offDepreciation  Less: provision for income tax General reserveDividend paidNet income for the year (Retained)Add: retained earnings on 31-12-2006

  1,25,000 10,00,000 11,25,000 2,00,000     2,05,000 5,000 35,000     20,000 1,00,000   

15,00,000    9,25,000 5,75,000 40,000 5,35,000   2,45,000 2,90,000 1,40,000 1,50,000  1,20,000 30,000 60,000 90,000

Additional InformationDuring 2007, the company purchased a building for Rs.1,00,000 you are required to prepare cash flow statement for the year ended 31st December 2007 

8 From the following balance sheet of X Co prepare cash flow statementLIABILITIES 2006 2007 ASSETS 2006 2007

Share Capital Share premiumP/L appropriationProfit for the year8% DebenturesProfit on redemptionOf debenturesSundry creditors.Provision for TaxProposed Dividend

4,50,000 ----- 60,000 ---- 2,50,000  ---- 2,20,000 40,000 45,000

6,00,000 15,000 60,000 50,0002,00,000  1,0001,90,000 50,000 60,000

Plant & MachineryLess: depreciation LandLoan to subsidiary Co.Shares in subsidiaryStockDebtorsBank

6,00,0001,20,0004,80,0001,83,00025,000 

30,0001,60,0001,20,00067,000

7,25,0001,45,0005,80,0001,98,000----  

40,0001,48,0001,62,00098,000

  10,65,000 12,26,000   10,65,000 12,26,000Additional Information1) During the year plant costing Rs.40,000 was sold for Rs.15,000. Accumulated

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Depreciation on plant was Rs.20,000. 2) Tax paid during the year Rs.55,000

9.Balance Sheet of Smith John Ltd.,LIABILITIES 2005 2006 ASSETS 2004 2005

Equity Share Capital 8% redeemable Preference shareCapital reserveGeneral reserveP/L/ a/cProposed dividendSundry creditorsBills Payable.Liability for outstanding expensesProvision for Tax 

3,00,000 1,50,000 --- 40,000 30,000 42,000 25,000 20,000  30,000 40,000

4,00,000 1,00,000 20,000 50,000 48,000 50,000 47,000 16,000  36,000 50,000 

GoodwillBuildingsInvestmentsPlants Sundry debtorsStockBills ReceivablesCashBankPreliminary Expenses 

1,00,0002,00,000 20,000 80,0001,40,000 77,000 20,000 15,000 10,000  15,000

80,0001,70,000 30,0002,00,0001,70,0001,09,000 30,000 10,000 8,000  10,000 

  6,77,000 8,17,000   6,77,000 8,17,0001. A portion of the building was sold in 2006 and the profit has been transferred to

capital reserve. 2. The written down value of a machine was Rs.12,000. It was sold for Rs.10,000.

Depreciation of Rs.10,000 is charged in 2006. 3. Investments are trade Investments Rs.3000 by way of dividend is received

including Rs.1000 from pre-acquisition profits which has been credited to the Investments a/c.

4. An Interim dividend of Rs.20,000 has been paid in 2006. Prepare Cash Flow statement.

 10.Given is the balance sheet below:

LIABILITIES 2004 2005 ASSETS 2004 2005 Share Capital General Res.P&L a/c Bank Loan(long term)Sundry creditorsProvision for Tax 

 2,00,000 50,000 30,500 70,000 1,50,000 30,000 

 2,50,000 60,000 30,600  ----- 1,35,200 35,000

 Land & Buildings MachinerySundry debtorsCashBankGoodwillStock  

 2,00,0001,50,000 80,000 500 ---- Nil1,00,000

 1,90,0001,69,000 64,200 600 8,000 5,000 74,000

  5,30,500 5,10,800   5,30,500 5,10,800Additional InformationDuring the year ended 31-12-2005

      Dividend of Rs.23,000 was paid      Assets of another Co. was purchased for a consideration of Rs.50,000 payable in shares.      The following assets were purchased: stock Rs.20,000, machinery Rs.25,000      Machinery was further purchased: Rs.8,000      Depreciation written off on machinery Rs 12,000

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      Income tax provision made during the year Rs.33,000      Loss on sale of machinery Rs.200 was written off to the general reserve

 11. Following schedule shows the balance sheet in condensed form of Sanjeev ltd.

At the end of the year 2005   2004 2005

AssetsCash and bank balances Sundry DebtorsTemporary investmentsPrepaid expensesStock in tradeLand and buildingsMachinery

Liabilities and CapitalSundry creditorsOutstanding expenses8% DebenturesDepreciation fundReserve for contingenciesProfit and Loss accountCapital

 

45,00033,50055,000 50041,00075,00026,000

2,76,000 

51,500 6,50045,00020,00030,000 8,000

1,15,000 2,76,000

 

45,00021,50037,000 1,00053,00075,00035,000

2,76,000 

48,000 6,00035,00022,00030,00011,500

1,15,000 2,76,000

The following information is also available.      10% dividend was paid in cash      New machinery for Rs.15,000 was purchased but old machinery costing Rs.6,000 was sold for Rs.2,000 accumulated depreciation was Rs.3,000      Rs.10,000 8% debentures were redeemed by purchase from open market @ Rs.96 for a debenture of Rs.100      Rs. 18,000 investment were sold at book value You are required to prepare cash flow statement.

 

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